The Eastern Enlargement of the Eurozone.(Book review)

The Eastern Enlargement of the Eurozone Marek Dabrowski and Jacek Rostowski (eds), Springer: Dordrecht, The Netherlands, 2006, 232pp.

doi:10.1057/palgrave.ces.8100193

This book is a collection of 12 papers presenting the results of the research project, 'Strategies for Joining the European Monetary Union', undertaken by the Centre for Social and Economic Research (CASE), the Warsaw-based international research and policy advisory organisation. Research for the book commenced in the pre-accession period but the publication was completed only after the enlargement of the European Union (EU) in 2004, when a number of new EU member states started to consider accession to the European Monetary Union (EMU). Since the new EU member states in the pre-accession period accepted the EMU as a part of the acquis communautaire, they are obliged to adopt the euro as soon as they fulfil the convergence criteria. Although they all hope that the accession to EMU will provide a tangible impetus to growth, membership in the EMU will have both benefits and costs. The benefits will be gains in trade and faster growth as the costs associated with exchange rate risks are removed. The costs will be loss of monetary sovereignty and the freedom to set interest rates to suit their specific economic conditions. Countries need to understand these issues. In any case, since the decision about the enlargement of the Eurozone has been already made, discussion on how to manage the process in optimal way is highly relevant.

The volume provides a comprehensive analysis of the theoretical, empirical and political issues that may come into play during the enlargement of the Eurozone. The first group of papers addresses theoretical and practical ramifications of EMU enlargement: the theory of optimum currency area and its implications for the Eurozone, the degree of trade and economic integration of new member states with the EU and the Eurozone, the degree of progress in nominal and real convergence already achieved by the new member states, the additional benefits from trade creation and investment in new member states that can accrue from their adoption of the euro, the nature of shocks experienced by the new member states, their labour market and fiscal challenges, dilemmas associated with the EMU-II mechanism and the choice of the final euro conversion rate, and the question of when and how to join the EMU. The last are two of the most crucial issues for the new EU member states.

A second group of papers deals with the functioning of an enlarged Eurozone and discusses such questions as the role of counter-cyclical fiscal policy, the future of the Stability and Growth Pact, the voting mechanism in the governing board of the European Central Bank (ECB), and the extent to which a single interest rate fits the economic realities of countries with different rates of productivity growth. Based on their findings, the authors propose policy recommendations both for new member states on how to manage their accession to the EMU and for the European Commission and the ECB on how to manage the enlargement of ...